The following is an editorial by Alicja Grzadkowska, senior news editor at Insurance Business. To reach out to Alicja, email her at [email protected]
When the pandemic hit and many countries introduced lockdowns that closed non-essential businesses and kept people at home, some auto insurers decided to offer discounts and refunds to customers for their auto insurance coverage, seeing as cars were staying parked at home. However, this move may not have gone far enough as it doesn’t seem to have been successful in safeguarding customer loyalty.
The refund measures implemented by auto insurers globally have been uneven, as have the results. In the US, Deloitte reported that “most personal auto carriers returned between 10% and 25% in premiums to customers during March, April, and May to account for the vastly lower number of miles being driven.” In some cases, states like California and New Jersey mandated premium refunds, or encouraged insurers to provide them.
Yet, the various auto insurance premium discounts in the US were not enough to instil customer loyalty, instead having the opposite effect and prompting customers to shop around for alternatives, according to a new study from J.D. Power. This was due to the fact that only 37% of customer respondents to the J.D. Power survey said they were aware of the discounts as of April 14, and even among those who knew that the discounts were being offered, 50% were more likely to shop for new insurance, switch and/or cancel their policies.
A number of Canadian insurers introduced similar refund measures. The Insurance Bureau of Canada (IBC) noted in April that many of its member companies were offering reductions in auto insurance premiums to reflect the reduced risk, and predicted that this could result in $600 million in savings for consumers. And yet these refunds have certainly not offset the premiums that consumers have paid up to this point in certain regions. In fact, a report commissioned by the Ontario Trial Lawyers Association found that motorists in the province have “almost certainly paid too much” for their auto coverage. Specifically, the report suggested that insurance companies operating in the province generated approximately $5 billion in pre-tax income from 2011 to 2016, including an estimated $1.5 billion in 2016.
In the UK, a handful of motor insurers offered discounts during the initial coronavirus outbreak, including Admiral, which offered a flat rate refund to its customers of £25, and LV=, which provided both car insurance and motorbike insurance refunds, with the rate ranging from £20 to £50. In the meantime, new research revealed that as many as 19.3 million drivers in the UK may be overpaying for their motor insurance, while another report from Hello-safe.co.uk highlighted that car insurance companies have raked in almost £1.3 billion in savings during the coronavirus pandemic, as claims fell dramatically between March 23 and May 31.
Heading over to Australia, the auto insurance refund picture looks a lot different. Suncorp, which has an extensive insurance portfolio, said that despite reduced cars on the road, the company was not offering a refund on insurance. A spokesperson explained the reasoning, noting, “Even with reduced people on the roads at the moment, cars are still at risk from storms, theft, damage while parked, and road accidents.” Meanwhile, Insurance Australia Group (IAG) – underwriter for NRMA, Coles Insurance and RACV, and Australia's biggest insurer – stated that customers could defer their premium payments or change to monthly plans rather than annual, according to the Daily Mail Australia, and if a customer wanted to cancel their policy, they were able to do so without paying cancelation or admin fees.
In New Zealand, several New Zealand insurers committed to premium rebates for customers, such as AA Insurance, Tower Insurance, and Medical Assurance Society, yet RNZ reported that insurance companies in the country would save around $100 million on payouts for motor vehicles during the lockdown because of the significant drop in driving during the pandemic. The Insurance Council of New Zealand nonetheless pointed to similar reasoning as Suncorp for why bigger refunds shouldn’t be made, since cars were still at risk from other threats.
Across markets, the coronavirus crisis has clearly underscored challenges in auto insurance, namely that consumers generally feel like they’re overpaying, while insurers operating in this market are trying to protect their bottom lines. The National Law Review in the US highlighted this conundrum, noting that while the amount of premium returned to policyholders should reflect the expected reduction in costs to the insurer, this amount can be difficult to quantify without relevant data from similar crises, which is hard to come by.
Into this arena have stepped alternative auto insurance providers, exposing the weaknesses in auto insurance customers’ loyalties. Take By Miles in the UK – the usage-based insurance (UBI) disruptor recently partnered with Zurich UK in a deal that will see Zurich underwrite policies that target drivers who travel less than 7,000 miles over a year. Rather than paying a traditional annual premium, they get comprehensive cover with a low fixed amount upfront and then make payments monthly based on their actual mileage.
These UBI options have popped up across global insurance markets in recent years, and to consumers, they appear to make sense. Insurance & Mobility Solutions has noted the rising satisfaction and retention of UBI among auto insurance clients because they’re saving more money, at the same time as claims costs are going down because UBI programs tend to reward safer drivers with lower automotive insurance costs, and thus attract people who are confident that they are safe drivers. In turn, UBI policies set up with insurance providers are often more profitable.
As auto insurers look out on the coronavirus-impacted marketplace, they should consider stepping back from refunds, unless they’re willing to go whole hog and make significant payouts. Even better, since refunds and discounts clearly haven’t worked in keeping auto insurance customers happy, insurers should turn their attention to long-term solutions that will keep customers loyal, such as insurance options that recognize the different risk profiles of drivers, and reward those who don’t drive a ton or are safer on the roads, using telematics data to back this up.
Changes like this – that show insurers are listening to customers, instead of handing out a few bucks one time amid a crisis – could help deter auto insureds from driving off into the sunset with a competitor.